What is water quality trading?

Water quality trading is a voluntary exchange of pollutant reduction credits. A facility with a higher pollutant control cost can buy a pollutant reduction credit from a facility with a lower control cost thus reducing their cost of compliance.

What are the benefits of trading?

Trading can produce substantial cost savings while meeting the same water quality goal. Trading also can provide ancillary environmental benefits such as flood retention, riparian improvement and habitat.

Who is involved in trading?

A permitted facility or a point source can trade with another point source or with a nonpoint source. The partners can trade directly, or through a third party. All stakeholders interested in their local watershed including conservation organizations and watershed groups, should be involved in the development of the trading program.

What is a credit?

A credit is a unit of pollutant reduction usually measured in pounds equivalent. Credits can be generated by a point source over-controlling its discharge or by a nonpoint source installing best management practices (BMPs) beyond its baseline.

What are the ground rules?

EPA's 2003 National Water Quality Trading Policy (Trading Policy) recommends basic ground rules for trading such as what pollutants can be traded, how to set baselines, when trading can occur, and elements of credible trading programs. Water quality trading programs must meet requirements of the Clean Water Act. In addition, the Trading Policy states trading must occur within the same watershed.

What pollutants can be traded?

EPA supports trading of nutrients and sediment load as well as cross-pollutant trading of oxygen demanding pollutants. EPA may consider supporting trades of other pollutants but believes that these trades require a higher level of scrutiny. EPA does not support trading of persistent bioaccumulative toxics (PBTs) except on a pilot basis.

When can trading occur?

EPA supports trading in unimpaired waters to maintain water quality standards as well as in impaired waters. EPA supports both pre-TMDL trading and trading under a TMDL. Trading scenarios include point source-point source trades, point source-nonpoint source trades, pretreatment trades, and intra-plant trades. EPA does not support trading that results in an impairment of an existing or designated use, adversely affect drinking water systems, or exceeds a cap established under a TMDL. In addition, the Trading Policy does not allow trading to meet a technology-based effluent limit (TBEL). Trading can be used to meet water quality based effluent limits (WQBELs) only.

What are baselines?

A buyer should meet its TBEL before buying credits. A buyer can use credits to meet its water quality-based effluent limit (WQBEL). A point source seller should meet its most stringent effluent limitation before it can generate credits. A nonpoint source seller should meet its TMDL load allocation or, if there is no TMDL, it should meet any state and local requirements before it can generate credits.

What common elements should a credible trading program have?

Legal authority: The CWA along with state regulations provide a legal authority for states and tribes to develop and administer trading programs.

Units of trade: A common unit of trade should be clearly defined.

Timing of credits: The creation and duration of credits should be considered. Credits should be generated and used within the same time period in order to comply with permit limits and prevent localized exceedances of water quality standards.

Managing uncertainty: The trading program should include methods of managing uncertainty such as using trading ratios, monitoring, modeling, and BMP efficacy estimates.

Compliance and Enforcement: The trading program should have mechanisms for compliance and enforcement. These could include record-keeping, certifications, inspections, and reporting.

Public notice: The program should include adequate public notice, for example, through the TMDL and permit process and a public website.

Program evaluation: Program evaluation should be used to modify and improve the program.

What are common trading scenarios?

Trading can occur directly between two or more point sources or through an exchange. Trading can also occur between a point source and a nonpoint source, either directly or through an exchange. A credit exchange is where a third party such as a person, organization, or website, facilitates trading. Another unique feature a credit exchange can include is a reserve of credits held in case of failed trades. These are the basic trading scenarios; others may exist.

What are trade ratios?

Trade ratios are used to ensure the amount of reduction resulting from the trade has the same effect as the reduction that would be required without the trade. Potential components of a trade ratio include:

Location: the location of the sources in the watershed relative to the downstream area of concern, for example, the Chesapeake Bay;

Delivery: the distance between the buyer and seller if the trade is to meet permit requirements at the outfall;

Uncertainty: the lack of surety of nonpoint source reductions;

Equivalency: the different forms of the same pollutant discharged from the trading partners, such as biologically available phosphorous and bound phosphorous; and

How can nonpoint source uncertainty be addressed?

When possible, edge-of-field or ambient monitoring should be conducted to gauge the water quality impacts of BMPs. Modeling is another option; however, it should be combined with some monitoring to verify the model. Field testing of BMPs, the use of conservative assumptions for BMP efficacy, and uncertainty ratios can also reduce uncertainty.